Global Climate Change Alliance: Intra-ACP Programme

Training Module Mainstreaming Climate Change Module 5 Costing, assessing and selecting adaptation and mitigation options and measures Ms Isabelle Mamaty Senior Expert Climate Support Facility

An initiative of the ACP Group of States funded by the European Union

Costing, assessing and selecting adaptation and mitigation options

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Learning objectives

: o To understand how to assess and select adaptation and mitigation options o To ensure that projects address development needs 

Expected outcomes:

o Increased knowledge on tools for costing and assessing adaptation and mitigation options o Increased knowledge on tools for prioritising and selecting adaptation and mitigation options 2

Linking policy, costing and budgeting

Mainstreaming of climate change in policies, strategies & programmes Identification of adaption and mitigation options Costing, assessment and selection of adaptation and mitigation options Resource allocation: Integration of adaptation and mitigation measures in budgets

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Tools for costing and assessing adaptation and mitigation options

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Cost-benefit analysis: identifying costs and benefits

Adaptation

Costs:

extra costs incurred compared with the ‘business-as usual ’ scenario

Benefits:

avoided damage and losses, extra developmental benefits compared with ‘business-as-usual’ scenario Mitigation

Costs:

extra costs incurred compared with ‘business-as usual ’ scenario, reduced economic growth opportunities

Benefits:

cost savings, sales of carbon credits, positive environmental and related health/livelihoods outcomes (+ difficult to value: strategic and competitive advantages)

Can you think of some examples?

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Cost-benefit analysis (1)

 Cost-benefit analysis (CBA): o Quantifies all the costs and benefits (*) of an intervention (with benefits including both ‘positive’ benefits and avoided losses) over the entire lifetime of the intervention o A ‘discount rate’ is applied to all costs and benefits to represent ‘preference for the present’ or simply the opportunity cost of capital -> calculation of ‘present value’ • • The higher the discount rate, the smaller the present value The further away in the future, the smaller the present value • Significant controversies over the ‘right’ discount rate for assessing

(*)

long-term options Actually the ‘incremental’ costs and benefits, i.e. the difference in costs/benefits between a ‘with intervention’ and a ‘no intervention’ scenario 6

Cost-benefit analysis (2)

Outputs of cost-benefit analysis:

Cost-benefit ratio (CBR)

Ratio of costs to benefits calculated at their present value (the smaller, the better – should be <1)

Net present value (NPV)

Benefits minus costs calculated at their present value (the larger, the better)

Internal rate of return (IRR)

The discount rate at which NPV = 0 A measure of the ‘benefit-generating power’ of the option or intervention (the larger, the better) 7

Cost-effectiveness analysis (1)

 Cost-effectiveness analysis (CEA): o Costs are valued in monetary terms, and benefits (*) quantified in ‘physical’ units, over the entire lifetime of the intervention; a discount rate is applied to both o This allows calculating unit costs, as the ratio of total discounted costs to total discounted benefits obtained o The obtained unit costs support : • • the comparison of several options comparison with ‘benchmark costs’ for similar interventions, where available

(*)

As in cost-benefit analysis, ‘incremental’ rather than absolute costs and benefits should be taken into account 8

Cost-effectiveness analysis (2)

 Compared with CBA, CEA: o is suitable where it is difficult to assign a monetary value to benefits o but requires identifying a single, all encompassing measure of benefits – which may be both difficult and reductive 9

Illustration of CEA: Global GHG abatement cost curve

Source: McKinsey (2009), Exhibit 8, p. 17 10

Example: land-based mitigation options

Significant mitigation potential for developing countries

Atmosphere

CO 2 CO 2 CH 4 N 2 O Typically cost effective and requiring low upfront investment

Forests

Net sink (tree biomass + soil organic matter)

Peatlands

Largest & most efficient terrestrial store of carbon biomass

Grasslands

Net carbon sink if not degraded

Improved ecosystem management also supports

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Cultivated systems

Both a sink and a source of GHGs, net balance depends on cultivation methods

Financial and economic analysis

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Basis for private sector decision making

Both CBA and CEA support: o

financial analysis

: considers the ‘monetary’ costs and benefits (or equivalent) accruing to parties directly concerned by a project or programme, at their ‘face value’ o

economic analysis

: broadens the analysis to more accurately reflect costs and benefits to society

Basis for public sector decision making

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Complementary tools

 For the assessment of robustness and the integration of uncertainty, CBA/CEA can be combined with: o the use of

multiple scenarios

(e.g. ‘no change’ scenario and various climate change and development scenarios) o

sensitivity analysis

(i.e. testing of the effect of changes in scenario assumptions on the CBR, NPV, IRR or unit costs) o

risk analysis

(-> risk probability analysis includes the probability of occurrence of various cost and benefit outcomes in calculations... assuming probabilities are known) 13

Tools for prioritising and selecting adaptation and mitigation measures

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Supporting decision making

 CBA/CEA support the financial and economic assessment of adaptation/mitigation options o They help identify measures that offer the best ‘value for money’ – a key aspect in situations of budgetary constraints  Other types of assessment and other criteria (e.g. technical, social, environmental) fully inform decision makers are required to

Multi-criteria analysis (MCA) helps integrate various criteria

Multi-criteria analysis (1)

   An approach to decision support that uses more than one criterion to assess performance and rank various options or interventions The term actually covers a wide range of methods Typically: o various options or interventions are assessed against a pre-determined set of criteria o qualitative ratings or quantitative scores are given o rules are then applied to rank options/interventions • Numerical scores can be added up to calculate a total score (with the possibility of applying different weights to different criteria) 16

Multi-criteria analysis (2)

  MCA is a useful complement to CBA/CEA Allows combining financial/economic criteria with technical, environmental and social ones  It can be used on its own, or in combination with CBA/CEA:

MCA before CBA/CEA

Allows reducing the number of options to which CBA/CEA is applied

MCA after CBA/CEA

CBA/CEA helps eliminate financially or economically unviable options, then MCA allows for final selection based on extra criteria 17

Example of MCA grid

Option Effective ness Cost or CBR (*) Technical feasibility Social & cultural acceptability Environm ental impacts Total score

Option 1 Option 2 Option 3 Option 4 Scores: from 1 (poorest performance) to 4 (highest performance). As far as cost is concerned, a scale should be established, with scores corresponding to a given cost range or cost/unit range.

(*)

CBR = cost-benefit ratio Adapted from USAID (2007), Exhibit 12, p. 18 18

Turning words into action

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Discussion

  Questions and answers Costing, assessing and selecting adaptation and mitigation options and measures

What are the opportunities for costing, assessing and selecting adaptation and mitigation options and measures in your sector or at your level and what are the institutional and capacity needs in your organisation to do so?

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Presentation of case studies

 Presentation of case studies using MCA grid 21

Learning process exercise: Working group

Exercise: Preparation of MCA grid for a specific project 22

Recap – Key messages

  Cost-benefit analysis and cost-effectiveness analysis support the identification of financially and economically viable adaptation and mitigation options/measures o Help prioritise actions based on financial/economic criteria Multi-criteria analysis, used alone or in combination with CBA or CEA, supports the assessment and prioritisation of adaptation and mitigation options based on multiple criteria o Technical, environmental and social criteria can be considered alongside financial/economic ones 23

Key references

   Economics of Climate Adaptation Working Group (2009)

Shaping climate-resilient development: a framework for decision-making

. Climate Works Foundation, Global Environment Facility, European Commission, McKinsey & Company, The Rockfeller Foundation, Standard Chartered Bank & Swiss Re USAID (2007)

Adapting to climate variability and change: a guidance manual for development planning

World Bank – Economics of Adaptation to Climate Change web pages: http://climatechange.worldbank.org/content/economics adaptation-climate-change-study-homepage 24

• Thank you • Contact: Dr. Pendo MARO, ACP Secretariat [email protected] or +32 495 281 494 www.gcca.eu/intra-acp 25